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Franchising's $2 Billion Lending Gap, and a New Plan to Fill It

What’s keeping the U.S. economy in the doldrums? One answer: Aspiring franchise owners can’t get the business loans they need to open the doors.

Many of these franchises are fast-food restaurants or retail stores that would hire workers. That hiring is being stifled by the small-business lending logjam.

Previously, the Small Business Administration had access to data on the financial health of many franchise systems — partly through its own database on SBA-backed loan failures. But bank loan officers had to do more legwork to research a franchise system, particularly commercial lenders not working with the SBA’s loan guarantee programs.

Many SBA-backed loans for franchise startups traditionally were secured by the franchise owner’s home equity. But the real-estate crash made it harder to go this route, moving more loan activity into the lap of bankers who don’t work with SBA. These commercial lenders have less experience working with franchise systems, so the lending pipeline slowed to a crawl.

The result is a backlog of pent-up demand for funding from franchisees who failed to get loans. The International Franchise Association (IFA) estimated this “lending gap” at $2 billion last year, representing some 10,000 franchise establishments that didn’t open that would have created roughly 94,000 jobs. The gap has eased slightly this year to $1.8 billion in loans denied, but a substantial shortfall remains.

Today, a new tool was unveiled that’s designed to help connect commercial lenders more quickly to detailed financial information on the health of franchisors, to cut through the paperwork and get loans signed. Created by IFA and the Consumer Bankers Association, the new Franchise Small Business Lending Accelerator is housed on the website The Franchise Registry — run by industry data house FRANData.

The sponsoring organizations are encouraging franchisors to help speed loan approvals for their franchisees by submitting their financials to the accelerator database, says IFA spokesman Matthew Haller.

“Lenders will be able to see detailed financial information on more than 3,000 franchise brands,” he says. “It should help lenders understand which franchisees are good risks, and which franchise models offer the highest potential for return on investment.”

The timing for the new Accelerator database is good, as banker interest in lending to franchise owners is definitely on the upswing. The Franchise Lending Index maintained by IFA and loan-matching portal Boefly showed franchise lending increased nearly 6 percent in June compared with May.

The franchise industry could benefit from seeing more owners coming on board. The IFA Franchise Business Index — which gauges the health of the industry based on employment, business ownership levels, owner confidence and other factors — declined for the first time in 10 months in June.

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I have talked to literally dozens of banks this year and have personally secured loans from 2 of them.

The banks have the money to lend, there is no lack of capital available.

The change is that there is now more documentation required, your debt to income ratio needs to be a little better and they won’t lend to you if your credit rating or net worth is too low.

Isn’t that how it should have always been though?

In the past there were situations where marginal candidates were approved for financing. Was this the right way back then? I think not.

I think that the updated requirements are correct. As far as 10,000 franchise units not getting funding, well that would mean they were not qualified financially to secure the lending.

If that is a real number, then I feel strongly that if they were not qualified they should NOT have received the capital from the bank.

I have been in franchising almost 10 years and I am here to tell you, if the banks can lend to you they will if you are qualified, if you are not qualified, then you won’t get the loan, simple as that.

I’m with you — have to feel that certainly some of these franchisees simply weren’t qualified for the loan.

The industry seems to be hoping they can help aspiring owners who might be in a gray area by getting the lenders more data on the strength of their chosen franchise system…I’m thinking particularly of newer or lesser-known franchises. I’m sure the banks already know Subway or McDonald’s metrics, but there are thousands of systems now…so I think there is hope the accelerator might help some of those less well-known brands get their franchisees funded. Assuming, as you say, they are qualified.

Does Forbes and the International Franchise Association (IFA) NOT know that Robert F. Tannenhauser former BLX Board Chairman and David Nayor former BLX Vice President, National Accounts Manager are principals at BoeFly.

The BLX SBA $77 million loan scandal is the largest to date. Patrick Harrington of BLX was sentenced to ten years in jail.

Forbes should know a a great deal about BLX since the magazine reported on the BLX scandal in a Forbes article – Cookie-Jar Capitalism – Elizabeth MacDonald on 02.12.07.

What’s wrong with International Franchise Association’s judgement and research at Forbes?

I think what is keeping the economy down is lending money to franchisees through franchisors who promote fraudulent opportunities to franchisee investors. Stop giving government Small Business Loans to Corporations who exploit franchisees through fraudulent advertising, fraudulent statistics and fraudulent Franchise Disclosure Documents. Get rid of tax payer organizations like the Federal Trade Commission who is about as useful as a pooped in baby’s diaper or eliminate all positions in the Federal Trade Commission and start from scratch. Let’s be honest with ourselves, the Federal Trade Commission is about as supportive of the American public as Eric Holder is to the American people. Eric Holder and the Federal Trade Commission have a lot in common. They both use their power to support corruption and promote dishonesty to American taxpayers.

I think the vast majority of franchisors are legit and their documentation is honest, Todd. Frauds usually don’t last long, especially now that there’s the Internet for wronged franchisees to connect on and file lawsuits together.

If you have some proof to offer about a franchisor providing a fraudulent FDD — a lawsuit franchisees won, perhaps? — feel free to cite it. Otherwise I think you’re generalizing about what might be a few bad apples in the industry, when there are a whole lot of successful franchisees and franchise concepts out there who are straightforward in presenting their opportunity.

While this overall issue is noteworthy in its own right, I think that it’s important to remember quality vs. quantity. While we are looking a potential 90k jobs to add, how many are going to pay living wages?

Our economic recovery is unique in that most of the new jobs are not sufficient to replace those lost. The majority pay less than $20k annually, followed by a small margin of high paying jobs, followed by an even smaller margin of middle income jobs near about $40k.

At that rate, we are doing little better than indentured servitude for the masses.